Carpe Diem

Gas Prices As Percent of Income Are Still Affordable

The chart above (click to enlarge) shows the cost of 1,000 gallons of gas at the retail price in each year from 1919 to 2007 using historical gas price data from the EIA, as a percent of GDP per capita in those years using data from Global Financial Data (paid subscription required).
1. As a percent of per-capita GDP to purchase 1,000 gallons of gas, gas prices in 2007 (about 6% of per-capita GDP) are still not even close to the levels reached in the early 1980s, when it cost 9-10% of per-capita GDP to purchase 1,000 gallons of gasoline in 1980, 1981 and 1982. It’s true that the inflation-adjusted prices of gas and oil are now about the same as in 1981, but per-capita real GDP is almost twice as high today as then!

2. Except for the 1990s, gas prices today as a percent of per-capita GDP are lower than every other previous decade: the 1920s, 1930s, 1940s, 1950s, 1960s, 1970s and the 1980s!
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Real Gas Prices: We’ve Had It Good for a Long Time

The chart above was created using inflation-adjusted gas prices from the Energy Information Administration from 1919 to 2008, along with the overall trend line for gas prices over the last 90 years.

1. The trend line shows that real gas prices (2007 dollars), started from a price slightly above $3 in 1919 and in general, on average, declined by a little more than 1 cent per year to about $2 in 2008. Obviously, gas prices are now way above the trend, but the general trend for the last 90 years has been steadily falling gas prices.

2. Real gas prices in 1919-1922 averaged $3.08 per gallon, higher than the average price so far this year of $2.98. And real GDP per capita today ($43,000) is about 6.5x higher than in 1919 ($6,675). In other words, adjusted for differences in real income, our ancestors in 1919 paid the equivalent of about $20 per gallon!

3. In the 69 years since 1940, real gas prices have been below the historical trend in 57 of those years and above the trend for only 12 years.

Bottom Line: Despite today’s high oil and gas prices, we’ve had it pretty good for a long, long time, with a long-run historical, 90-year trend of a decline in real gas prices.

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What About Tuition Gouging, Windfall Endowments

The graph above was created using college tuition data from the National Center for Education Statistics (with estimates for 2007 and 2008), Consumer Price Index data from the BLS, and average annual oil price data for West Texas Intermediate Oil from Global Financial Data. All series are set to an index value of 100 in the base year of 1976. Comments:

1. During a 22-year period from 1982-2003, real oil prices were below their 1981 level.

2. College tuition has increased by almost 10X since 1976, compared to a 7.48X increase in oil prices over the same period.

3. Given the fact that college tuition has gone up by far more than oil prices over the last thirty years, why doesn’t rising college tuition get the same attention as rising oil prices? Where are the Congressional hearings on “tuition gouging,” “windfall university endowments ($411 billion currently),” etc.
Carpe Diem

Why Decoupling May Save The World Economy

Exports from emerging economies to U.S. have fallen, while exports to other emerging economies have remained strong:

Emerging markets now export more to China than to the U.S.:
THE ECONOMIST“Decoupling” is the source of a great deal of controversy. Economists argue about whether or not emerging economies will follow America into recession. Recent data suggest decoupling is no myth. Indeed, it may yet save the world economy.

Decoupling does not mean that an American recession will have no impact on developing countries. The point is that their GDP-growth rates will slow by much less than in previous American downturns. Most enjoyed strong growth during the fourth quarter of last year, and some speeded up, even as America’s economy ground to a virtual halt and its non-oil imports fell.

Here are some reasons that globalization and decoupling can co-exist:

Reason 1: While exports to America have stumbled, exports to other emerging economies have surged (see top chart above). China’s growth in exports to America slowed to only 5% in the year to January, but exports to Brazil, India and Russia were up by more than 60%, and those to oil exporters by 45%. Half of China’s exports now go to other emerging economies. Likewise, South Korea’s exports to the United States tumbled by 20% in the year to February, but its total exports rose by 20%, thanks to trade with other developing nations.

Reason 2: The popular argument that business cycles should become more synchronised in a globalized world rests on an out-dated impression that poor countries mainly export to rich ones. Instead, emerging economies’ trade with each other has risen faster and now accounts for over half of their total exports. Emerging markets as a group now export more to China than to the United States (see bottom chart above).

Reason 3: The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China’s GDP, 4% of India’s, 3% of Brazil’s and 1% of Russia’s. Over 95% of China’s growth of 11.2% in the year to the fourth quarter came from domestic demand. China’s growth is widely expected to slow this year but to a still boisterous 9-10%.

Reason 4: Previous American downturns have often caused the prices of oil and other raw materials to slump, but this time China’s surging demand is propping up prices and fuelling booms in Brazil, Russia and the Middle East.

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Monetary Mystery?

The top chart above shows the annual percentage changes in the monthly monetary base from 2002-2008. The bottom chart shows M1 (red) and the monetary base (blue) from 2002-2008.

Clearly, the growth rate of the monetary base (“high-powered money”) has been slowing, and both M1 and the monetary base have been flat for three years.

Q: How can inflation be a problem when M1 has been flat for three years, and the growth rate of the monetary base has been declining for six years?

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Ancient Land of Pharaohs Has A High-Tech Future?

Silicon.com Egypt is making a pitch to be the next offshore outsourcing hot-spot, claiming that its foreign language skills and low labour costs put the country in a strong position to compete with India and eastern Europe.

AT Kearney recently ranked Egypt number 12 in a list of top offshore outsourcing destinations and while the country’s share of the offshore call-centre market is still very small, analyst Datamonitor predicts it will grow by 52% over the next 12 months.

Egypt’s leading call center company Xceed has a 1,200 seat operation at a new government-subsidised high-tech Smart Village just outside Cairo where salaries for staff working on offshore accounts range from around $400 to $500 per month.
The company, whose customers include General Motors, Microsoft and Oracle, also has no problem picking the best candidates – with 18,000 applications received for each position.
Adel Danish, chairman and CEO of Xceed, speaking to silicon.com at the company’s Egypt headquarters this week said the country is ideally situated to be a near-shore outsourcing destination for European companies.

He said: “Egypt can be for Europe what India is to the US.”
Carpe Diem

The Age of Milton Friedman:Good Time To Be Alive


Amidst all of the gloom and doom, here is some good news from a recent paper by Harvard economist Andrei Shleifer titled “The Age of Milton Friedman“:

The last quarter century has witnessed remarkable progress of mankind. The world’s per capita inflation-adjusted income rose from $5,400 in 1980 to $8,500 in 2005 (see chart above). Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast. With the conspicuous exceptions of China and the Middle East, the world has made significant strides in democratization. Compared to 1980, many more countries in the world are democratic today.

We’ve seen remarkable declines in infant mortality in all regions, with the worldwide population-weighted average dropping from 64.5 to 37.5 per thousand births. The World Bank reports that between 1980 and 2000, the share of the world’s population living on less than $1 a day fell from 34.8 percent to 19 percent. It forecasts that the number of people living on less than $1 a day will continue to fall sharply despite population growth, and account for 10 percent of the world’s population by 2015. Billions of people in Asia have been lifted out of poverty thanks to economic growth; Sub-Saharan Africa, with little or no economic growth, is where the really poor are concentrated.

As Pete Geddes reminds us “By most measures, this appears to be a very good time to be alive.”

Shleifer continues:

The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.

(HT: NCPA and Greg Mankiw)

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Trade Isn’t A Threat, It’s Why We Are Prosperous

“Democratic candidates for national office will: 1) make negative comments about free-trade deals while campaigning in a state where hundreds of thousands of blue-collar manufacturing jobs have been lost and yet 2) be committed to free trade should they happen to win.”

~Daniel Gross in his Slate.com article “NAFTA Nonsense

~Rod Hunter in today’s WSJ article “The Democrats and Trade:

On the campaign trail, both Hillary Clinton and Barack Obama are pandering to organized labor and other antitrade activists on the left.

It is tempting to dismiss this as empty posturing — important for electioneering but likely to be forgotten after November. But words matter. If one of the Democrats wins the White House, he or she may find that the antitrade tirades delivered carelessly this year will, by next, have unleashed protectionist forces not easily controlled.

Mrs. Clinton is distancing herself from and even dismissing her husband’s trade legacy, which includes enacting the North America Free Trade Agreement (Nafta), creating the World Trade Organization (WTO), and negotiating China’s admission into it. She is now calling for a “time out” from any new trade pacts. Mr. Obama, unburdened by a record to defend, blames Nafta for shipping jobs abroad and “forcing parents to compete with teenagers for minimum wage jobs at Wal-Mart.” He wants to renegotiate Nafta.

It is true that there is a lot of churning as jobs are destroyed, but even more are created as firms enter, exit or are resized in a dynamic economy. Back in 2004, Ben Bernanke, then a Federal Reserve governor, looked at Bureau of Labor Statistics data stretching back a decade and pointed out that about 15 million jobs were lost and 17 million created each year — an annual net creation of nearly two million jobs. What’s more, only about 2.5% of the jobs lost were a result of import competition. The vast majority of jobs lost were caused by changes in consumer tastes, domestic competition, and technology.

It is also true that U.S. manufacturing has been shedding jobs since the late 1970s, with workers increasingly moving into services (see chart above, click to enlarge). But we have seen this process before. In 1900, it took about 40% of the American workforce toiling on the farm to feed the country. Today, thanks to farm mechanization, agricultural chemistry and other innovations, a mere 2.5% of the workforce feeds the nation and exports about third of U.S. farm production.

Trade is not the threat Mrs. Clinton and Mr. Obama allege. It is a central reason why American workers are among the world’s most productive and prosperous. An economy open to trade is also an economy free enough to thrive in a changing world.

Carpe Diem

The Tenacious Survival Instinct of the Civil Servant

From The Economist:

Belgium’s central bank still employs more than 2,000 people, even though it has not had a currency to oversee since 1999, when it abandoned the Belgian franc and joined the euro. The survival instinct of Belgian civil servants is especially impressive when you compare the National Bank of Belgium’s headcount with that of central banks which still have currencies to attend to. Belgium employs twice as many central bankers as Britain and four times as many as Sweden.

Carpe Diem

Falling Prices:The Real Solution to Housing Collapse

Economist Steven Landsburg made the “case for foreclosure” in Slate.com, and was featured in this CD post on Tuesday.

Writing in today’s IBD, columnist Robert Samuelson makes a convincing case for falling home prices as the only real solution to the country’s housing problems:

Gloom. Doom. Calamity. Home prices are tumbling. We’re bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse.

The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

It’s elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don’t sell. We can either keep the price at $1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.

Even many economists who should know better describe the present situation as an oversupply of unsold homes. True, there is about 10 months’ supply of existing homes as opposed to four a few years ago. But the real problem is insufficient demand.

There aren’t more homes than there are Americans who want homes; that would be a true surplus. There’s so much supply because many prospective customers can’t buy at today’s prices.